Oracle Rallies; Waiting Out The Storm In Redwood Shores

By Eric Savitz

Oracle(ORCL) shares today have rallied impressively following last night’s better-than-expected results for its fiscal third quarter ended in February. The analysts who track the stock were generally impressed with the numbers; I would note that is the same crew that had been cuttingexpectationsheadingintothequarter. (Though even most of the estimate-cutters continued to recommend the stock.)

Guidance for the May quarter was below the consensus, although a few analysts asserted that they were likely in line with the “whisper” numbers expected by the buy side. Pacific Crest’s Brendan Barnicle points out that the Street seems to have been caught by surprise in terms of the strength of the company’s European business in the latest quarter; he notes that most analysts due most of their channel checks in North America, where business was slower.

Overall, the Street continues to view Oracle’s large installed base of maintenance-paying enterprise customers as a protective shield from the broader economic downturn; to many, Redwood Shores looks like a pretty good place to hide out from the storm. I would note that quite a few analysts cut EPS forecasts to adjust for the weaker-than-expected May quarter outlook; but a few pushed numbers up, and a couple of analysts upped their price targets.

Here’s a quick roundup of some of the chatter from this morning’s batch of ORCL research:

Brendan Barnicle, Pacific Crest: He notes that the company managed to grow non-GAAP maintenance revenue by 12% despite a “massive currency headwind.” Adds Barnicle: “given that maintenance drives more than 50% of total revenue, it remains a key to Oracle’s consistency.”

David Hilal, Friedman Billings Ramsey: He says that while guidance for the May quarer was below expectations, he says that the miss was widely expected, is partially due to currency and assumes conservative close rates. “We continue to favor Oracle as a relative outperformer in this downturn,” he says, due to its maintenance stream, business diversity, earnings and cash flow stability, reasonable valuation and its newly installed cash dividend.

Mark Murphy, Piper Jaffray: “While guidance was mixed due to a much weaker global economy and significant adverse FX headwinds, we continue to believe ORCL’s earnings can show resiliency while the company gains market share.”

Brent Thill, Citigroup: He likes the fact that the company is paying a dividend, asserting that “it expands the overall addreable investor base.” He upped his target to $21, from $20, and adds that the “key to ORCL’s success in this spending downturn is the existing base of 320,000 customers.”

Adam Holt, Morgan Stanley: “Oracle’s large base and expanding product portfolio are enabling it to gain share and sustain earnings better than most in a difficult climate.”

Heather Bellini, UBS: She thinks Oracle will use its strong cash flow to fund more acquisitions “and would expect the company to become more acquisition in the near term given the significant pullback in valuations.” Special kudos for the best note title, in The Killers allusion category; she called her piece “Mr. Brightside.”

John DiFucci, J.P. Morgan: “Impressive results in the face of the obvious (a deteriorating macro backdrop and increasingly negative currency effects since guidance was given) and the expected (resulting demand softness in both its applications and infrastructure software businesses.)”

Tim Klasell, Thomas Weisel Partners: “It has been one of the best, if not the best, executing companies we follow.”

Michael Turtis, Raymond James: “We see Oracle’s performance this quarter as encouraging for other large, defensive stocks with high levels of recurring mainteanance and subscription revenue, including CA and BMC Software

Special mention for the small group of skeptics that still remain on the stock:

Tom Ernst, Deutsche Bank: “We see negative growth, a balanced risk/reward and increasing threats long term [from software as a service companies]” offsetting its consolidation strategy. He maintains a Hold rating.

Patrick Walravens, JMP Securities: “We stay on the sidelines because we beleive the pressure on IT spending may persist for six to eight quarters.” His rating: Market Perform.

Brent Williams, Benchmark Co.: He says the new dividend policy is “an implicit admission that the business sufficiently mature that top line growth above the rest of the large-cap software universse and margin expansion, the twin drivers of the stock appreciation over the last few years, are not going to be as powerful as in the past.” His rating: Hold.

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Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.